5 Bankruptcy Myths Demystified

Sadly, bankruptcy myths prevent many individuals from seeking bankruptcy relief. They fear the horror stories they hear about filing bankruptcy are true. Instead of seeking legal advice from an experienced bankruptcy attorneys, they rely on half-truths and outright falsehoods about bankruptcy law.

Below are five bankruptcy myths followed by the truth about bankruptcy relief.

Bankruptcy Myth Number 1: Paying Your Debts is Better Than Filing Bankruptcy

Bankruptcy is not right for every person and every financial situation. A careful analysis by a bankruptcy attorney will reveal if bankruptcy is the best way for you to get out of debt while protecting your income and assets. Unfortunately, many financial sources advocate using bankruptcy alternatives intended to pay debts in full instead of filing for bankruptcy relief.

However, continuing to struggle to pay debts when you do not have enough money to pay those debts can result in the loss of property, retirement funds, and savings. Continuing to pay debts you cannot afford to pay can result in greater harm to your financial future than had you filed for bankruptcy relief.

Before you decide which debt relief option is best for you, make sure you get all the facts about bankruptcy. A Chapter 7 or Chapter 13 bankruptcy filing may be the best path you have to resolve debt problems and rebuild your finances.

Bankruptcy Myth Number 2: Bankruptcy is a Sign of Personal Failure

Some people believe that anyone who files for bankruptcy relief mismanaged their money or lived beyond their means. In reality, most individuals who file a bankruptcy case are recovering from a financial hardship that was beyond their control.

Common reasons that people file for bankruptcy relief include:

·  Medical bills and other debts incurred because of an accidental injury or sudden illness

·  Unemployment or long-term decrease in income

·  Loss of a spouse because of divorce or death

·  Business closing or decrease in business income

·  Outliving retirement savings or insufficient retirement income

At Scura Law Firm, we believe that filing for bankruptcy relief is not a personal failure. It is a sign that a person is taking a positive step to address a financial problem and move forward. Even for debtors who file Chapter 7 because they overused credit cards or did not understand how to manage money wisely, bankruptcy can be a positive step in learning how to manage credit. Everyone deserves a second chance, regardless of the reason they come to the bankruptcy court.

Bankruptcy Myth Number 3: You Lose Everything When You File Bankruptcy

The assumption that people lose all their property when they file a bankruptcy case is one of the most common bankruptcy myths. Lawmakers recognized that people need to retain a certain amount of property when they file for bankruptcy relief to recover from a financial crisis and rebuild their finances. If a person is left with nothing after filing bankruptcy, it will be nearly impossible to get back on their feet.

Therefore, lawmakers included bankruptcy exemptions within the Bankruptcy Code. Bankruptcy exemptions protect certain amounts of equity in specific pieces of property, such as a home, vehicle, furniture, and clothing. Exempt property cannot be used to pay a person’s debts.

Most states allow individuals to choose between federal bankruptcy exemptions and state bankruptcy exemptions. A bankruptcy attorney can review your case before you file your bankruptcy petition to determine if the equity in any property exceeds the bankruptcy exemptions. If so, the attorney may discuss filing a Chapter 13 to protect property or the benefit of surrendering one piece of property to wipe out thousands of dollars of debt.

Bankruptcy Myth Number 4: You Get Rid of All Debts When You File Bankruptcy

Most general unsecured debts can be discharged (wiped out) by filing a Chapter 7 or Chapter 13 bankruptcy case. When a debt is discharged, the creditor is barred from attempting to collect the debt. In other words, you cannot be forced to repay the debt after it is discharged in bankruptcy. However, not all debts are eligible for a discharge.

Debts that are not discharged in bankruptcy include:

·  Child support payments

·  Spousal support or alimony

·  Restitution payments

·  Taxes (some old taxes may be discharged)

·  Most debts owed to government agencies or entities

·  Student loans (some debts may qualify for a hardship discharge)

Additionally, filing bankruptcy does not release liens on property. If a creditor has a valid lien on property, the individual can continue to pay the payments to keep the property or surrender the property in satisfaction of the debt. However, some debtors can reduce their car payments and eliminate second mortgages by filing a Chapter 13 bankruptcy case.

Bankruptcy Myth Number 5: You Will Never Recover Financial Wellbeing After Filing Bankruptcy

Yes, your bankruptcy filing will remain on your credit report for seven to ten years from the filing date, depending on the bankruptcy chapter you file. However, the truth is that there is life after bankruptcy. You can improve your credit score and rebuild your credit rating after bankruptcy.

When you file for bankruptcy relief, your credit score typically decreases temporarily. The amount of the decrease depends on your financial situation and your credit score at the time of the bankruptcy filing. 

Individuals who have good credit scores and a few late payments may see a more substantial decrease in their credit score when filing bankruptcy compared to individuals who have numerous late payments and low credit scores.

There are many ways to restore credit ratings after bankruptcy. For many individuals, filing a Chapter 7 or Chapter 13 case is the first step in improving their financial future.

Written by John J Scura III, Esq.                                                                                                          Partner, Scura, Wigfield, Heyer, Stevens & Cammarota, LLP
